By David Hargreaves
The Reserve Bank is going to relax its high LVR lending limits from January 1.
The easing of the LVR restrictions will involve loosening the deposit requirements for investors to 35% from the current 40%.
As far as owner-occupiers are concerned, the RBNZ says it will roll back the current 'speed limit' applied to banks of just 10% of their new lending for loans of over 80% of the value of the property. This 'speed limit' will be relaxed to 15%.
(Clarification: The 'speed limit' applies to the banks. It does not make any direct difference to what an individual depositor requires. The relaxation of the rules means that the banks will be able to lend now to more people who have less than a 20% deposit than they could before. The relaxed rule means that from January 1 banks will be able to advance 15% of their new lending for mortgages where the buyer has a less than 20% deposit. Up till now the banks have only been able to advance 10% of their new lending for mortgages where a deposit of under 20% is put in place.)
In announcing the beginning of rolling back the LVRs, RBNZ Acting Governor Grant Spencer signalled that developments in the market in the wake of these changes would be watched closely.
“The Bank will monitor the impact of these changes and will only make further LVR adjustments if financial stability risks remain contained," he said.
"A cautious approach will reduce the risk of resurgence in the housing market or deterioration in lending standards."
The changes announced on Wednesday by the RBNZ, when releasing its latest Financial Stability Report (FSR), were signalled to some extent by the central bank earlier this month.
But it is fair to say that the announcement does go further than certainly a lot of bank economists were expecting, with many thinking that the RBNZ would merely outline the process for how a gradual relaxation of the LVRs might occur.
ASB chief economist Nick Tuffley said the relaxation of the LVR restrictions "happened a little sooner than we had expected".
"The financial stability risks in housing have receded. However, given a degree of uncertainty around how temporary the election has impacted market activity and uncertainty over when government tax/housing policies will take effect, we had expected the RBNZ would wait a little longer. But the shifts are modest."
He said the ASB economists expect that any future moves would follow the pattern of the first move, with incremental easing of the restrictions.
"The next obvious moment for a future RBNZ decision is the next FSR, in May next year. By that stage the RBNZ will have been able to assess how the housing market has behaved in the initial months after the January easing, as well as have a clearer idea of the Government’s housing-related actions."
This is the statement released by the RBNZ:
New Zealand’s financial system remains sound and risks to the system have reduced over the past six months, Reserve Bank Governor Grant Spencer said today when releasing the Bank’s November Financial Stability Report.
“Momentum in the global economy has continued to build over the past six months, reducing near-term risks to financial stability. However, the New Zealand financial system remains exposed to international risks related to elevated asset prices and high levels of debt in a number of countries.
“Domestically, LVR policies have been in place since 2013 to address financial stability risks arising from rapid house price inflation and increasing household debt. These policies have helped improve banking system resilience by substantially reducing the share of high-LVR loans. Over the past six months, pressures in the housing market have continued to moderate due to the tightening of LVR restrictions in October 2016, a more general firming of bank lending standards and an increase in mortgage interest rates in early 2017.
“Housing market policies announced by the Government are also expected to have a dampening effect on the housing market.
“In light of these developments, the Reserve Bank is undertaking a modest easing of the LVR restrictions. From 1 January 2018, the LVR restrictions will require that:
- No more than 15 percent (currently 10 percent) of each bank’s new mortgage lending to owner occupiers can be at LVRs of more than 80 percent.
- No more than 5 percent of each bank’s new mortgage lending to residential property investors can be at LVRs of more than 65 percent (currently 60 percent).
“The Bank will monitor the impact of these changes and will only make further LVR adjustments if financial stability risks remain contained. A cautious approach will reduce the risk of resurgence in the housing market or deterioration in lending standards.
Deputy Governor Geoff Bascand said “Looking at the financial system more broadly, the banking system maintains adequate buffers over minimum capital requirements and appears to be performing its financial intermediation role efficiently. The recovery in dairy commodity prices since mid-2016 has supported farm profitability and has helped to reduce bank non-performing loans in the sector. Recent stress tests suggest that banks are well positioned to withstand a severe economic downturn and operational risk events.
“The Bank has released two consultation papers on the review of bank capital requirements and a third paper on the measurement and aggregation of bank risk will be released shortly. The aim of the capital review is to ensure a very high level of confidence in the solvency of the banking system while minimising complexity and compliance costs.
“The Bank has also completed a review of the bank directors’ attestation regime and is making good progress in implementing a new dashboard approach to quarterly bank disclosures. This is expected to go live next May,” Mr Bascand said.
At the RBNZ's release of the latest Monetary Policy Statement earlier this month the central bank was more confident than previously about the possibility of the housing market taking off again, with Spencer then saying: "Low house price inflation is expected to continue, reinforced by new government policies on housing."
The previous warning contained in past releases that "there remains a risk of resurgence in prices" was gone.
The LVRs were originally brought in towards the end of 2013 as part of the new 'macro-prudential toolkit' that had been signed off between then Finance Minister Bill English and then RBNZ Governor Graeme Wheeler earlier that year.
The latest iteration of the LVRs saw housing investors slapped with a 40% deposit requirement. While this was officially applied from October 1 last year, it effectively began being implemented by the banks straight after it was announced by the RBNZ on July 19, 2016.
The RBNZ said in its latest FSR that prior to LVRs originally being introduced in 2013, the share of banks’ mortgage portfolios with LVRs above 80% had steadily increased to 21%, "posing a risk" to financial stability.
"This reflected that around a third of new loans being originated had LVRs above 80%.
"As a result of the LVR policy, the share of outstanding mortgages with LVRs above 80% steadily declined to under 8% in September 2017 (figure A1).
"Tighter LVR rules applied to property investor lending have seen the share of outstanding mortgages at LVRs between 70% and 80% decline since late 2015."